Analyst Conference Summary

biotechnology

conference date: October 26, 2017 @ 1:30 PM Pacific Time
for quarter ending: September 30, 2017 (third quarter, Q3 2017)

Forward-looking statements

Overview: Continuing revenue decline. Increased full 2017 year revenue guidance.

Basic data (GAAP) :

Revenue was $6.51 billion, down 9% sequentially from $7.14 billion and down 13% from $7.50 billion in the year-earlier quarter.

Net income was $2.72 billion, down 11% sequentially from $3.07 billion and down 18% from $3.33 billion year-earlier.

Earnings per share (EPS, diluted) were $2.06, down 12% sequentially from $2.33 and down 17% from $2.49 in the year-earlier quarter.

Guidance:

Net product sales now expected between $24.5 and $25.5 billion, increasing the low end o the range. This reflects lower expected HVC product sales and higher non-HVC product sales. Product gross margin 86% to 87%.

Conference Highlights:

In the quarter Sovaldi was approved for HCV in China. The FDA expanded the label for Epclusa for HCV. The EU and FDA approved Vosevi for HCV.

Declines in HCV revenue, due to competition, pricing, and fewer patient starts, were partially offset by increased HIV product sales, particularly the new TAF-based products. Adjusted non-HCV revenue was up 16% y/y. Viread and Truvada have lost exclusivity, as expected. HCV pricing will decline again in 2018.

The dividend of $0.52 will by payable on December 28 to stockholders of record as of December 15.

Gilead acquired Kite Pharma in October for $11.2 billion. Soon afterward received FDA approval for Yescarta, a CART therapy for Large B-cell Lymphoma (after failure of 2 previous lines of therapy).

Non-GAAP numbers: Net income was $2.99 billion, down 11% sequentially from $3.37 billion and down 19% from $3.68 billion year-earlier. Non-GAAP EPS was $2.27, down 11% sequentially from $2.56 and down 17% from $2.75 year-earlier.

Product sales were $6.40 billion, down 9% sequentially from $7.0 billion and down 14% from $7.41 billion in the year-earlier quarter. $4.5 billion U.S. product sales. $1.2 billion European sales. Rest of world $663 million.

Royalty, contract and other revenue was $110 million, up sequentially from $95 million, and up from $95 million year-earlier.

Cash and equivalents ended at $41.4 billion, up sequentially from $36.6 billion. $3.0 bilion was raised with senior unsecured notes to fund the Kite Pharma acquisition (which completed after the quarter ended.) $2.7 billion cash flow from operations. $153 million was used for repurchase shares. $682 million paid in dividends. Long term liabilities were $29.8 billion. $6.0 billion more was raised in term loans in October.

Gilead has 3 cancer therapies in Phase 3, and many more at earlier stages of the pipeline. Collaboration with other companies, notably with AstraZeneca for combinations with checkpoint inhibitors, are also underway.

Selonsertib for NASH is in Phase 3 studies. GS-9674, and GS-0976 for NASH are in Phase 2 studies. Last week GS-0976 reported positive Phase 2 results.

Filgotinib is now in Phase 3 trials for rheumatoid arthritis, Crohn's, and ulcerative arthritis. Six additional Phase 2 study across a range of diseases are planned with partner Galapagos.

Numerous other studies are underway or planned; see Gilead pipeline. The Kite Pharma pipeline is now also part of Gilead.

Cost of goods sold was $1.03 billion. Research and development expense was $789 million. Selling, general and administrative expense was $879 million. Income from operations was $3.81 billion. Interest expense $291 million. Other income was $150 million. Income tax provision was $959 million.

Q&A:

HCV new starts vs. competition? Contracts have become a 15 month cycle this year. New contracts will go through the balance of 2018. 51,000 starts in the quarter, down. And we lost some market share due to a new entrant. We believe we are still in a strong position for 2018.

When might we see HCV revenue flatten our? We are not guiding for 2018 yet. Pricing impact will be in place by end of 2017. But we have not completed the contracting process. The Medicaid managed care segment is where we are least competitive.

NASH GS-0976 data and next steps? Data showed a good reduction in liver fat and some lowered biomarkers for fibrosis. We will almost certainly start combination studies in 2018. There was some increase in triglycerides in some patients, but it should be manageable, and some evidence it is a temporary spike.

Yescarta, how will it be paid for? We believe 50% to 60% commercial payers, rest mostly Medicaid. Kite believes Yescarta will be covered, with varying reimbursement levels. Medicare may eventually supply about a third of the patients. It is common to not have a DRG at launch. We think a CART specific DRG may take a while, but hospitals are adept at using other DRGs in novel situations.

HCV pricing has gravitated down towards 8 week HCV genotype one pricing, but not finished with negotiations yet.

Pricing per patient, you could use $373 (thousand) for Yescarta.

Any appetite for M&A after Kite? We are interested in bringing in technologies to move CART forward. It will require continuous innovation. But M&A will be ongoing.

HCV patient starts have decline about 2% per month since the beginning of the year. We don't expect that to change in Q4.

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